Rising budget deficit threatens Israel's credit rating

The Ministry of Finance has just three months to bring the budget deficit below 3%.

The Ministry of Finance is holding hurried consultations in the wake of alarming data, still unpublished, showing a fall in state tax revenues and a dramatic rise in the budget deficit. Sources inform "Globes" that following figures for September, the cumulative budget deficit is projected to exceed 3.3% of GDP, the highest rate in years, almost 1% more than the 2.5% cumulative deficit in September. The Ministry of Finance has not yet published the current budget performance figures, although it usually does so at the beginning of each month.

The budget deficit target is 2.9%, and the Ministry of Finance has only three months to bring the cumulative deficit below 3%. It appears that for the first time in the current government's term, there is a real risk that the budget framework will be breached, which would have clear implications for Israel's credit rating. The Ministry of Finance's professional staff has therefore been holding frenzied consultations in recent days with participation from the Accountant General, the budget director, senior executives in the Israel Tax Authority, and others. It is clear to the staff at the meetings that the two regular ways of reducing the deficit, cutting spending or raising taxes, are impossible because of political constraints, in view of the approaching elections.

Additional alarming figures for the dive in state tax revenues were presented in the internal discussions. Tax Authority representatives present predicted that tax revenues this year would be NIS 3 billion less than the forecast, and they expect a further decrease in revenues in 2019. Tax revenues have exceeded the forecasts for the past three years, leading Minister of Finance Moshe Kahlon and Prime Minister Benjamin Netanyahu to argue that cutting taxes increases state tax revenues, rather than reducing them.

The shocking budget figures do not include demands for more money on the Ministry of Finance's agenda. These include the demand for a substantial defense budget increase being promoted by the prime minister and NIS 7 billion in retroactive salary payments to policemen and prison guards. Under pressure from the Ministry of Finance, Netanyahu passed a cabinet decision allowing a petition to the High Court of Justice against a ruling granting policemen and prison guards pay rises, but retracted it following threats by the policemen and Minister of Public Security, Strategic Affairs, and Information Gilad Erdan.

Ministry of Finance sources told "Globes" that the drop in state tax revenues in September was no surprise, given the large number of holidays during the month and that fact that there were very few workdays during it. As for the Tax Authority's prediction of a further decrease in state tax revenues, the sources expressed confidence that they would nevertheless meet the original state revenue forecast, saying that the year could be completed without exceeding the budget deficit target of less than 3% of GDP.

Published by Globes [online], Israel business news - en.globes.co.il - on October 9, 2018